1031 Exchanges Involving Overseas Real Estate

If you own real estate in a foreign country, or if you are planning an acquisition in a foreign country, can you conduct a 1031 exchange to avoid triggering immediate capital gains tax liability in the U.S.? As a general rule, U.S. taxpayers can conduct 1031 exchanges involving overseas real estate. However, some special considerations apply, so it is important to consult with an experienced 1031 qualified intermediary before you start the process.

The ”Like Kind” Rule for International Real Estate

We’ll get one of the most important special considerations out of the way first: Section 1031 only applies when you exchange one piece of overseas real estate for another. Under Section 1031, an exchange must involve properties of “like kind,” and domestic real estate is not considered of “like kind” with real estate located in other countries.

As a result, if you are planning your first international real estate investment, you cannot conduct a 1031 exchange purely for this purpose (though you could use “boot” from a domestic 1031 exchange to fund your overseas acquisition). Likewise, if you are thinking about selling an offshore property and reinvesting in the United States, this transaction would be ineligible for 1031 exchange treatment as well.

But, outside of the United States, almost any international real estate asset will be considered of “like kind” with any other. This is true even if the assets are located in different countries.

Additional Requirements for International 1031 Exchanges

Along with satisfying the “like kind” requirement, international 1031 exchanges must satisfy all of the other requirements that apply to exchanges involving U.S. properties. These requirements include:  

• Timing – As a general rule, once you sell a property (the relinquished property), you have 45 days to “identify” the replacement property you intend to acquire through the 1031 exchange process. A 1031 exchange must also generally be completed within a total timeline of 180 days. However, options such as delayed exchanges and reverse exchanges provide opportunities to extend these timeframes by working with a 1031 qualified intermediary.
• Parties – Under Section 1031, the taxpayer that sells a relinquished property must generally be the same taxpayer that acquires the replacement property. However, it is permissible to use a disregarded entity (such as a limited liability company (LLC)) for one or both transactions, and when conducting a reverse exchange, taxpayers can (and must) work with a work with an Exchange Accommodation Titleholder (EAT) which temporarily holds either the relinquished or replacement property.
• Exchange – To qualify for capital gains tax deferral under Section 1031, a transaction must truly involve an “exchange” of one property for another. As a result, taxpayers seeking deferral cannot collect the proceeds from the sale of their relinquished property directly. Instead, they must work with a third party—such as a 1031 qualified intermediary—that helps to facilitate the process in accordance with Section 1031’s requirements.
• Business or Investment Purposes – A property is only eligible for 1031 exchange treatment if it is held (or being acquired) for business or investment purposes. As a result, vacation homes and second homes generally do not qualify, although there are steps property owners can take to establish eligibility.

While international 1031 exchanges are subject to the same requirements as exchanges involving domestic properties, they also provide the same opportunities for flexibility. These include the opportunities to conduct delayed exchanges and reverse exchanges, as noted above. Additionally, while domestic and international properties are not considered of “like kind” under Section 1031, there are no other country-based restrictions under Section 1031, and all of the following types of properties are considered of “like kind” with one another:

• Single-family residences
• Apartment buildings and condominiums
• Commercial properties
• Vacant land

As a result, it is possible to conduct a 1031 exchange involving overseas real estate in a wide range of circumstances. To ensure that you take all of the necessary steps—and to ensure that you have the documentation you need to prove your transaction’s eligibility for 1031 exchange treatment if necessary—it is important to work with a 1031 qualified intermediary throughout the process.

Consult with a 1031 Qualified Intermediary for Free

Do you have questions about conducting a 1031 exchange involving overseas real estate? If so, we can help, and we invite you to get in touch. We provide 1031 qualified intermediary services for international like-kind exchanges worldwide. To arrange a free, no-obligation consultation at 1031 National Services, please call 888-872-1031 or tell us how we can reach you online today.